Understanding Risk-Bearing Contracts in Value-Based Care

In value-based care (VBC), providers take on more financial risk than ever before. This can be overwhelming, as most physicians are accustomed to traditional fee-for-service payments, where they’re predictably reimbursed for every service they provide. 

While fee-for-service is straightforward and reliable, there are problems with this payment model. For one, it can incentivize physicians to increase the amount of services they provide, regardless of whether they are clinically necessary or benefit the patient. It can also lead to fragmented, inefficient care, which drives up the overall cost of healthcare.  

For these reasons and more, there has been a growing shift to value-based care, where providers take on more financial risk through the use of alternative payment models.

According to the Centers for Medicare and Medicaid Services (CMS), an alternative payment model “gives added incentive payments to provide high-quality and cost-efficient care.”

Rather than getting paid for volume of care, providers are rewarded for the value of care they provide. By assuming more of the financial burden, they are drawn to make smarter decisions about healthcare utilization. And for payers, compensation is tied to how well providers lower healthcare costs and improve patient outcomes.  

Overall, this shift leads to greater accountability among physicians. If implemented correctly, the rewards can be sizable for providers, patients, and payers alike. 

Even so, making the transition to value-based care can be administratively and financially daunting. Many independent physicians may hesitate to make the leap for fear of financial strain and poor return on investment.  

Fortunately for providers, several types of alternative payment models exist, depending on the size and health of their population, the market in which they practice, competency, and level of risk they are willing to assume. This allows them to ease into a value-based care model without the stress of full financial risk at the get-go. 

Dipping Your Toes into VBC 

Pay-for-performance (P4P) models offer providers a way to dip their toes into value-based care. 

P4P uses the fee-for-service structure, but providers also qualify for reimbursements and incentives based on predetermined quality of care, patient satisfaction, and cost savings metrics.  

Private payers are starting to create P4P programs, but CMS has led the way, developing various alternative payment models that impact hospital reimbursement through Medicare—including the Hospital Readmissions Reduction Program (HRRP) and the Hospital Value-Based Purchasing Program. 

P4P contracts do not require robust data analytics compared to other alternative payment models, so small practices that lack access to adequate technology to track data can still participate. 

Some critics say providers may skew treatment regimens toward P4P practices, steering away from truly optimized care. However, studies show programs like HRRP have been successful, with hospital readmissions steadily falling since 2012. 

Shared Savings Models 

The next step in value-based alternative payment models is shared savings (or upside risk) arrangements.  

In upside risk, providers compete against certain predetermined benchmarks. If they meet the benchmarks and keep their total cost of care (TCOC) below the financial target, they share in the savings.  If their TCOC exceeds the target, though, they are not penalized or required to pay the difference. 

Upside risk benefits providers by allowing them to keep some of the savings they helped generate. In fee-for-service contracts, the savings would remain with the payer alone. 

Medicare Shared Savings Program (MSSP) is one of the biggest and most well-established shared savings programs. MSSP is designed for accountable care organizations (ACOs)—networks of independent physician groups that share in the financial and medical responsibilities of a Medicare population.  

“ACOs bring multiple providers together, which gives them more scale and access to support services to drive performance,” explains Elizabeth Mills, Chief Financial Officer at Innovista Health. 

MSSP requires ACOs to report on quality and cost metrics and provide coordinated care across all specialties. Everyone works together to streamline care and eliminate duplication of services. 

Downside Risk 

In downside (or two-sided) risk, providers share in savings and risk. With these contracts, physicians receive allotted funds per patient and retain a defined portion of the surplus generated. However, if they spend more than they’re given, they are responsible for a defined portion of the deficit. 

While there is much more financial risk, there’s also a greater opportunity for reward if the provider drives down the cost of care. Physicians can share in up to 100% of savings dollars. Because of the potential for losses, downside risk models more strongly motivate doctors to transform their practices to achieve the highest cost-saving potential. 

CMS has introduced DCE and ACO Reach, which allow providers to move to a downside risk model for their Medicare populations. Between 2012 and 2017, fewer than 10% of ACOs assumed downside risk. But as of 2020, that number jumped to 37%. This move to is expected to drive down medical spend by $2.9 billion over 10 years. 

Capitation & Delegation 

Downside risk payment models always involve capitation and/or delegation. 

Delegation is where a payer transfers defined services from themselves to healthcare providers, such as claims, customer service, credentialing, or utilization management.  

Capitation is an agreement where the payer establishes risk pools, usually a per-member-per-month (PMPM) dollar amount for every enrolled health plan member. The amount payers give physicians is based on several factors, such as average expected healthcare utilization and risk profile of the patient pool.  

If the provider or group keeps their TCOC for the year below the capitated amount, they get to keep that money. TCOC that’s higher than the capitated amount results in loss. 

How do capitation and delegation work together, and how does that affect overall financial risk? 

Mills explains, “If you are claims delegated and capitated, the payer is going to send you a PMPM amount, and you are responsible for paying all the claims across the continuum of care. If you’re capitated but not claims delegated, there’s no monthly cash movement. The payer will continue paying those claims and after the performance year, you will settle with the payer based on the surplus or deficit for the full performance year.” 

The benefit of taking on delegation, according to Mills, is increased control and/or data availability. “For example, if you have claims delegation, you have the claims data in real time at the time of processing to react to.”  

With that robust data comes the ability to better serve your population in the most cost-effective manner possible—which confers savings in the long term. 

How Much Risk Is Too Much? 

Providers interested in entering into a value-based care model ultimately need to decide what level of risk they’re willing to assume. Considerations include historical experience with taking on risk, access to technology and support services, cash flow considerations relative to the timing of funding, and the potential deficit they are at risk to fund. 

Furthermore, they need to know and understand their population. For one, is it big enough?

Mills says, “Providers need to be cognizant of the size of their patient panels in determining the level of risk they are comfortable taking on. If your population is too small, it can be statistically challenging to perform. If you have 500 patients and one very acutely ill patient, it’s hard to offset that level of medical spend.”  

Providers also should have a good handle on their historical performance with their patient pool.  

“The higher the level of risk a provider has taken on, the more data available to that provider to understand how well they have performed on a relevant population,” says Mills. “If you have a consistent history of performance and the tools in place to monitor your performance as the performance year progresses, that’s usually when you can start to think about taking on more risk. If downside risk is a consideration, financial planning is critical to ensure you have the resources to sustain a potential loss.” 

Finally, timing is important. Providers need to consider their multi-year plan on their pathway to risk. They need to ensure they they have the staff, partners, and technology in place to succeed and add risk when they’re best positioned to perform. 

The Bottom Line 

Stepping into a value-based care model has definite risks, but also plenty of substantial rewards—enabling providers to align financial incentives to better patient outcomes.  

Physician groups can ease the transition into value-based care by working with partners like Innovista Health, who understand the intricacies of payer arrangements and the importance of data analytics to drive better business and healthcare decisions.